This is not meant to be investment advice for anyone, only an observation for those who trade and have the stomach for penny stocks.
Micro cap, Small Cap, Penny stocks, Micro-CRaps, call them what you will. One who ventures into the world of trading penny stocks will know the euphoria of watching a stock move up on high volume, gap up on oversold conditions or gain momentum from a significant company development. There is nothing like it, but be careful. “Penny Stocks” tend to run in three day cycles. “Penny Stocks” aren’t for everyone.
As an example the first day of the run can be initiated by a major announcement from the company either before the market or at anytime during the market. If the stock is thinly traded the first buy orders will usually catch sleeping market makers on the stock off guard, pushing the stock up a certain percentage which then triggers the radar scans of most day trading software. The run in the company’s stock has begun under natural circumstances. For the purpose of this article the MM’s job is to maintain an orderly market as the stock begins to gain momentum and an increase of buy orders to sell orders.
Toward the end of the day usually with two hours to go you will see a pullback in the share price as the dip sometimes coined “Market Maker Shakeout” can trigger a severe panic sell or scare, followed by massive buying going into the last hour as day traders and short term investors position themselves for day two, the “Gap up”.
Although on occasion if the buy volume and upside price movement doesn’t come back in the last hour of trading it could just be a one day fizzle and you’ll see a race to the bid the next day most likely trading lower than the price began the day before as longer term investors will sell in an attempt to capitalize on the new found liquidity.
Day two: Gap UP or Gap and Trap? - In some cases day two can be the breadwinner. If the momentum in the last hour of day one was significant leading to a close near the high of the day, a stock can gap up in the Pre-Market on the second day sometimes as much as 100% as market makers scramble to find shares for new buyers who missed the move and want in, or “covering” of shares by active MM’s to flatten their unintentionally oversold books. This is where investors will look to take some profit toward the end of the first hour of the market on day two. If the stock can hold that sell off and consolidate it has a chance to close day two higher than day one.
Again on occasion if the buy volume and upside price movement can’t come back off the morning dip a painful sell-off could follow as investor’s race to the window salvaging gains or original invested capital, leaving us with the critical day three.
Day three: The end of the line – At this point investors who got in on day one will take their profits as the volume on day three is usually the lesser of the three days. The lack of liquidity and upward price movement signals a time to move on for most penny trading fanatics. It doesn’t mean that you should sell your entire position that is between you and whom you get your investment advice from. In some cases a base will form at these higher levels awaiting further significant developments from the company before continuing higher, if the company continues to bring forth significant developments in a timely fashion it is possible the price per share could find a much higher base than when you first bought it giving you a little risk diversity in your investing efforts. For the most part “Penny Stocks” are best rented and not owned.
Editor
PreMarketData.com
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